(Yicai Global) March 7 -- China’s tax refunds and tax cuts will reach a record high of about CNY2.5 trillion (USD395.6 billion) this year.

Sixty percent of the total, or CNY1.5 trillion, will be used to refund excess input value-added tax credits, most of which will go to ease the burden on micro and small firms as well as manufacturers, according to a government work report submitted by the State Council to the annual meeting of the National People’s Congress, China’s national legislature, on March 5.

This will be the first time for China to reimburse micro and small businesses for excess input VAT credits, Tian Zhiwei, deputy director of the Institution of Public Policy and Governance of Shanghai University of Finance and Economics, told Yicai Global.

It is an important move to encourage business expansion, help struggling firms turn losses into profits, and cut start-up costs, Tian said.

Micro and small firms will be prioritized and will receive lump-sum refunds by the end of June, while reimbursements for manufactures and other businesses will be handled gradually.

Excess input VAT refunds via lump-sum payments will result in great financial pressure, given the huge amount involved, Tian said, noting that phased refunds to sectors including manufacturing, scientific research and technical services, ecology and environmental protection, electricity and gas, and transport can effectively control financial risks.

Manufacturing is the backbone of China’s economy, Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law at the China University of Political Science and Law, told Yicai Global. Scientific research and technical services along with ecology and environmental protection are related to economic transformation and upgrade, while transport, electricity and gas are connected with people’s livelihoods, Shi pointed out.

By focusing on these, China aims to consolidate its economic foundations and promote economic transformation and upgrading, Shi said.

VAT made up about 37 percent of the country’s total tax revenue last year. If a company’s input VAT exceeds output VAT, there will be an excess input VAT. In the past, the excess input VAT was deducted from the amount payable in the next tax period. But in 2019, China introduced a new non-retroactive policy, according to which some qualified firms could obtain an excess input VAT refund in the same tax period.

Editors: Dou Shicong, Futura Costaglione